Supreme Court rules on taxability of lawyer fees to client in contingent-fee cases

In Commissioner v. Banks, the Supreme Court issued an 8-0 opinion which considered the question of "whether the portion of a money judgment or settlement paid to a plaintiff’s attorney under a contingent-fee agreement is income to the plaintiff under the Internal Revenue Code." The answer is yes: "We hold that, as a general rule, when a litigant’s recovery constitutes income, the litigant’s income includes theportion of the recovery paid to the attorney as a contingent fee."

One of the two cases involved employment discrimination claims that were settled. The Court refused to give retroactive application to the tax provisions of the American Jobs Creation Act of 2004, but observed that its the future application of the statute will limit the effect of its ruling in connection with future claims of unlawful discrimination.